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Ranges Are Breaking

CAMS Weekly View from the Corner – Week ending 8/20/21

August 23, 2021

When an area of the stock market or even the stock market as a whole cannot trend they carve out what is known as a range. That is, they cannot achieve higher price highs or lower price lows. With this, a trading range is carved out when looking at the market in question. In recent months we have intermittently drawn attention to this developing behavior. As weeks have turned to months ranges throughout the stock market have become prevalent if not the norm. The key to ranges is to focus on when they break – either up or down – thereby creating a new trend. We have seen various attempts at upward range breaks in various areas of the stock market – including the very broad equal weighted S&P 500 – in recent weeks/months but they stopped as quickly as they began. When this occurs it is a market message that something is not quite right in the view of market participants when they look out into the future. Throughout the stock market structure we have now begun to see trading ranges break to the downside. Areas of the stock market as well as other markets that have been able to hold the low end of their established ranges have succumbed to breaking down. As shared, the key to ranges is to focus on when they break and the direction of said break. Currently, the breaks are downward and with this offer concern. The overwhelming question that leads to said concern is will these developing range break behaviors bleed throughout more and more of the market landscape and in so doing then lead to obvious stock market issues that impact well recognized mainstream indices such as the overall S&P 500 or even the Dow Jones Industrials two name a couple.

Click For Larger View:

Anatomy of Deteriorating Price Behavior

We can think of the above chart as an anatomy of deteriorating price behavior that is suggesting an additional range break – to the downside – may be in the offing. Importantly, if this occurs it will be representing the aforementioned broadening concern of breaking trading ranges as the above chart is the Russell 2000 Small Company Index. This index is well recognized when inquiring on the price behavior of smaller companies within the stock market. (As an aside, its kissing cousin the Micro Cap Index (even smaller companies) has already broken its range to the downside offering further bleed-through deterioration.) The above annotated chart clearly identifies the long trading range depicted by the solid horizontal black lines. The small red arrows at the top of the black lines denote trend attempts that quickly failed. In each instance they failed notably. In addition, noted by the red circles toward the bottom of the chart, we have had tremendous out-of-nowhere downside trading volume spikes that signal an exodus out of this market. This type of trading behavior represents further deterioration and concern. Taken further, the gentle sloping upward red line represents the average price for this index over the previous 200 trading sessions. This index is now struggling to remain above its average pricing for the previous 200 days. This represents weak pricing behavior and offers additional downside concern if it fails to continue holding above its 200 day price average. Lastly, looking at the trading range in its wholeness (between the black lines) we can see in recent weeks this small company index is limping along even within its established range. Previously, if the index went to the low end it would find a way to move to the top of the range rather quickly whereas in recent weeks it has struggled to gather notable momentum off the bottom of the range representing further lack of enthusiasm for this area of the stock market. Small Companies

In addition to all of the above it is important to realize that small companies are quite sensitive to general economic conditions. With this, market participants’ lack of enthusiasm for this area of the stock market adds additional questions for the overall future economic backdrop and market landscape. This is not a new pricing development as the above range has been in place for months while in recent weeks participants have become even less enthusiastic for these small companies. Adding to this, small company market performance typically outperforms in times of forward price inflation expectations. Through this we can glean market participants are not riled up about on-going price inflation at this time. Time will tell but currently this area of the market is struggling and other areas, as stated, have begun to break their established ranges to the downside. All told, these behaviors continue to offer a level of caution in the market landscape.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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